Welcome To Freedom Bonds

Investing

As of late 2007, Baby Boomers began collecting their Social Security payments, marking the beginning of an interesting time when there will be a long list of them in the retirement age. Due to their size alone, they form a demographic category that has more total spending power than anyone else on the globe, which in turn makes their investing and spending power very impactful on the U.S. investment landscape and the economy overall.

Those approaching retirement must keep in mind that the choices they you make today will affect what their financial status will be 20 years (or more) down the line. This is the minimum one can expect, given that the average life expectancy for the baby boomer has been calculated as 83 years.

Here are 5 best investment strategies that you must consider:

Variable Annuity (VA)

Believe it or not, the value of insurance become more important as you approach your retirement age. While traditional whole life policies still remain, there now exist some newer, more updated theories and products which have garnered enough attention to make their own place. One such product is the variable annuity, which permits investors to sign up for what is very much like an insurance policy, the only difference being that the balances can be invested into bonds and stock holdings.

Variable Annuities allow holder to gain on cash balances above inflation, which is a key factor in keeping your insurance’s value. That being said, it is always better to be safe, and select a variable annuity with restraint, given that fees for each type tends to be very different. Also make sure that you understand every fee that you are paying, from annual fees and underlying investment fees to front- and back-end sales fees.

U.S. Treasuries

U.S. Treasuries actually make up for the sole investment for many retirement-aged individuals. With yields that are regarded as a benchmark of safety (the risk-free rate of return), treasuries make for a very safe and reliable investment, especially when the odds are risky. All treasury bonds are controlled by the U.S. government, which has so far not defaulted on a single Treasury bond. No matter how you access exposure to Treasuries, from individual bonds and mutual funds to exchange-traded funds, and others, they lend a lot of weight to your overall portfolio.

For those above 60 years of age, capital preservation is much more essential than capital appreciation. Not only do treasuries offer this, they also offer a steady stream of income and a chance for you to preserve your assets during inflation. While municipal and corporate bonds are sold in the same manner, they tend to have higher default rates and require more research to be done by the investor for evaluation of merits.

Certificates of Deposit (CDs)

CDs stand only second to Treasuries thanks to their high yield (which often goes higher than that of Treasuries of the same maturity), as well as the feel-good factor of giving your hard-earned money to an established financial institution like a bank. Plus, there is the Federal Deposit Insurance Corporation (FDIC) insurance. The only thing there is to remember here is that there is a threshold of $250,000 per bank, since the FDIC insures a specific limit to individual account holders. If your amount is greater than this, you will have to spread your money over several different banks.

Real Estate

As with any demographic, real estate is an investment that pays well if done wisely. As someone approaching retirement, there are many avenues you can explore: from buying a second property and/or rental property, to converting from a paid-off mortgage to a smaller but more efficient home. Many people actually enjoy moving to a smaller home and/or a new location. These options will help provide asset diversification and help you save on taxes, as well a offer you a place where you can spend that much-deserved extended vacation-time.

You must keep in mind to not take such decisions lightly though, and must consider consulting a certified advisor before you actually decide to embark on a decision. After all, there is a lot that needs to be considered here, from your net-worth diversification and liquidity needs to your finances and personal tax situation. Plus, if you opt to keep a rental property, you will yourself have to put some work and effort behind it.

Individual Retirement Account (IRA)

It is virtually impossible to make a best investment strategies list that does not have this option, and for good reason. In fact, if you’re one of those who has been investing for years, you probably have a well-funded IRA already. Once you retire, your 401(k) assets will roll over to either a Roth or a Traditional IRA. And in case you’ve crossed the age of 50, you can add more than your standard annual contribution limits to your account. IRAs make a particularly good strategy, since they have the ability eliminate capital gains taxes and reduce your future tax bills significantly.

Both the Roth and the traditional IRA have their own advantages. While asset transfers to a Roth IRA are not tax-deductible (meaning you still have to pay income taxes), the income that you will go on to receive will be completely tax-free. Furthermore, the assets in your IRA must reflect your overall asset allocation.

Special Mention: The Wild Card

Yes, we mentioned five investment strategies. But we decided to include this spot for those who apprehensive of spending 20+ years sitting around having nothing to do. While good investment ideas do involve careful financial planning, they also sometimes (if not always) involve (being creative and following your passion). In fact, any one of your hobbies can function well as an investment opportunity. This includes several activities such as:

Starting your own business

Classic cars

Paintings and fine arts

Coins and collectibles

Sports memorabilia

That being said, you must be well aware that these too have their boundaries. After all, there is no point in starting a business which will keep you so busy that you finally get in way over your head. However, if there is something you are truly interested in – and preferably have good knowledge about it, you must not hesitate to take it further, now that you will enter a phase in your life when you actually will get the time to do so. We do live in a world that is brimming with possibilities and age is really just a number. So long as you stick to putting a fixed percentage of your net worth (a maximum of 10%), you will be completely fine.

To Conclude:

Now that you are approaching retirement, the choices you make can and will affect how you will be leading your lifestyle for decades to come. You must, therefore, make sure to properly think about what you need, set your goals, and then set about selecting the best strategy (with the help of a professional) to achieve said goals.

Judging by the looks of it, the BP oil disaster (aka Deepwater Oil Spill), despite causing the destruction it did, doesn’t really have anything special about it. After all, it is neither the first nor the last oil spill in the US, and neither is it the largest or the worst by any measure – that spot goes to the Greenpoint Oil Spill, in which over 250 million gallons of oil and refined product was leaked into aquifers under the streets of Los Angeles by Chevron refinery leaked for quite a few decades until its discovery in the late 1970s. It has been estimated that cleaning the mess made by this oil spill will take another half a century to clean up.

However, if we take a closer look, these oil spills collectively cause – and cost – much more than one can imagine. Not to mention the unhealthy “addiction” we have when it comes to keeping the commodity under our control – as the future generations in smog-filled cities as losing up to 1% of their vital lung function annually and weather patterns all over the planet are getting altered by leaps and bounds, we’re waging trillion dollar wars in Iraq as an “exercise” to control more oil, leaving tar sands exposed in Canada, consuming much more energy to extract than deliver in fuel to our tanks, and over and above everything – not being bothered about finding ways of generating energy other than burning the earth’s limited fossilized remains.

From the looks of it, it seems like an endless situation where there’s nothing we can really do. But then, WE CAN.

Believe it or not, we do possess the power of relegate all these “current” events right to the past and let them be a part of the history books. And we can do that by harnessing the power of an idea that was once very instrumental in saving the world.

Back in World War II, Patriotic Americans in thousands had bought war bonds in order to finance the path to victory and end the global tyranny that was the Axis. Why not re-use this marvelous tool again, rechristen them (as “Freedom Bonds” and put an end to this new form of global tyranny that currently exists in our lives?

The logic behind Freedom Bonds is to have the Treasury issue “revenue bonds” and subsequently use the funds collected to build a series of compressed natural gas (CNG) and Hydrogen fueling stations, and electric car charging stations, as well as support infrastructure for utilities and companies and utilities to provide those clean transportation fuels to consumers. That’s not all the bonds can do though – these bonds can help pay for those who are willing to convert their existing gas/diesel vehicle to hydrogen or CNG (just about any bus, truck or car that runs on the road these days can be converted to run on them) and fund American automakers who want to re-tool their assembly lines and make newer, more eco-friendly models which run on cleaner alternatives. They can even be used to finance a variety of fleets of widely-used vehicles such as school buses, government fleets, municipal bus lines, and trash trucks, which have been converted to a more eco-friendly version.

Note, however, that these are “revenue bonds” – marvelous as this plan is, we have no intention on spending even a single taxpayer’s hard-earned dollar directly on them. We plan to “repay as we go,” by repaying the bonds with generous interest, from normal fuel surcharges added to the cost of each fuel. In order to kickstart this system, however, we do need a bond financing mechanism, as the early revenues will be low in comparison to the upfront costs (which will initially be significantly higher). With time and progress, however, these bonds will be repaid in full (with interest) by the future users of vehicles which run on cleaner and greener fuels.

All said and done, we don’t consider using the special T-bills to curb our oil-obsession and tragic spills as the most patriotic part of our plan – that is yet to come.

In addition to the aforementioned, all, i.e. 100% of the billions of dollars that will be used to fund Freedom Bonds will be entirely spent on improving the American job sector. By using the bonds to pay mechanics to convert vehicles, build clean fueling infrastructure, help premier car manufacturers make 21st Century trucks and cars, we will set into motion a one-of-a-kind series of investments which will reap benefits for years to come. Freedom bonds will help create and maintain full-time, permanent and secure jobs which will help America help itself and the rest of the world create innovative technologies which will go on to (positively) change the world and the way we see it.

Believe it or not, every single one of us, at some point or the other, looks at the sordid picture of the Gulf and longs to do something that can change the situation, only to realize that we, as common people are powerless. We know that the available oil is bound to run out soon, despite all the efforts being put in by governments and oil companies to acquire the next barrel for themselves.

Not anymore. Buy buying Freedom Bonds, we can help those in need by making a sound investment that will make this problem the last of its kind. Which makes this – here and now – the best time to buy them.

Life for the baby boomers hasn’t been easy, at least as far as saving for retirements is concerned. They have indeed experienced quite a few hard knocks. However, they now have a sound retirement saving strategy in place – one that can actually be beneficial for the younger generations as well.

A lot has happened in the last 40 years which has pretty much spelt doom for common investment strategies – from sudden busts and booms, periods of deflation and inflation, to sharp rise and fall of interest rates and speculative ventures gone bad. bubbles that ended badly. To top it over, the S&P 500 in this period has stood at an average of 12% a year (a figure that includes both price range and dividends.

While one cannot say that boomers have been stable through all this time, one can definitely say that they have learnt well from their failures. And they are now keen to find ways that will help them save for the rest of their saving years.

According to an American Funds study, 65% boomers reported that they felt smart as investors when they stuck with their investment strategy. In the same study, 6 out of 10 reported that they remain quiet when the market gets volatile. Only a mere 2% say that they feel smart when they make a move that’s bold and risky but well-rewarding if it works.

The younger generations, however, don’t seem to share this sentiment. For instance, only 43% of millennials feel smart when sticking with their strategy, while the rest only feel smart when they attempt to pick a hot stock. The latter’s percentage, here, is almost 6 times more than the boomers.

Baby boomers, however, thanks to their experience, have learnt an entirely different lesson. They’ve understood that good times don’t last long – let alone forever. Thanks to the huge market upheavals following the financial crisis, a mere 16% of boomers believe that they will continue to get their benefits either at the same rate or at a better rate. This is of course a lesser figure that the 31% who believe the same.

All said and done, there is a perfect explanation why millennials are more optimistic. Given that they understood the importance of saving much before their boomers counterparts did, they have a bigger edge over them. According to the American Funds study, almost 60% of the millennials began to save for retirement before the age of 25, as compared to only 28% of boomers. That being said, they also tend to have a more pessimistic view of their later lives, thanks to the debt that most of them face, especially in the form of student loans. As opposed to the baby boomers, who believe that they will be happy throughout retirement, millennials do not believe that they will be that lucky.

The study also shows that despite their wise savings habits, baby boomers do tend to have their blind spots. While they do remain committed to low-cost index funds (which are known to produce good results in the long-term), they also leave them vulnerable to sharp short-term downward market moves, which, according to 81% of boomers, is a great matter of concern.

If your portfolio mainly consists of investments and bonds, with stock index funds forming a very low percentage, it is better to stick to index funds. However, half of all generations still fail to understand the problems short-term risk of an index fund – the fact that things can turn real ugly real fast in case the market turns sharply lower, especially during the initial period of retirement.

Any bond’s instrumental characteristic – which authenticates it and distinguishes it from any other – is the entity that has issued it, since as an investor you’re counting on that issuer to have your hard-earned money returned to you.

The following are the most commonly-used types of bonds:

– Investment-grade corporate bonds (high quality)

– Higher yielding corporate bonds (poor), referred to as “junk bonds”

– Bonds that are backed by a mortgage

– Foreign bonds

– Municipal bonds

– Treasury bonds

– Other U.S. government bonds

Investment-grade corporate bonds

Carrying ratings that are at least triple-B from Moody’s Investors Service, Standard & Poor’s – or both (For the ignorant: ratings go with triple-A being the highest, followed by Double-A, Single-A, Triple-B and so forth), investment-grade corporate bonds are issued by financing institutions or companies which have stronger balance sheets.

Although the risk of such bonds defaulting is considered very remote, their yields still score much higher than both agency and Treasury bonds, despite the fact that they are fully taxable – like most other agencies. These bonds, however, tend to underperform Treasuries and agencies during times of economic downturns.

High-yield bonds

Generally carrying ratings below triple-B, high-yield bonds are issued by financing institutions or companies which have weaker balance sheets. The prices of these bonds are directly related to the health of corporate balance sheets. These bonds tend to track stock prices more closely than their investment-grade counterparts. According to Steve Ward, Chief Investment Officer of Charles Schwab Corporation, high-yield bonds do not provide the kind of asset-allocation benefits that come with mixing high-grade stocks and bonds.

Mortgage-backed bonds

These bonds have a higher face value as opposed to other bonds ($25,000 for such as opposed to $1,000-$5,000 for others). They do, however, suffer from what is called “prepayment risk.” The value of such bonds drop as mortgage prepayments rise to a higher rate – which is why they do not reap rewards from declining interest the way other bonds do.

Foreign bonds

A rather complicated kind of bond, foreign bonds are of different types. While there are some which are dollar-denominated, most foreign bond funds have approximately 1/3rd of their assets in foreign-currency-denominated debt (Source: Lipper).
For foreign bonds that are denominated by foreign currency, the issuing party makes a promise to pay in fixed interest — and thereafter return the principal amount in a different currency. The size of said payments once they get converted into dollars depends on the prevalent rates of exchange. For instance, if the dollar proves to be stronger than the foreign currency, foreign interest payments get converted into smaller dollar amounts (and vice versa).

The performance of a foreign bond fund depends more on exchange rates than on interest rates.

Municipal bonds

Popularly known as “munis,” municipal bonds are issued by U.S. states and local governments and their sub-agencies. They are available in investment-grade as well as in high-yield varieties. Although interest for such bonds is indeed tax-free, it does not automatically translate to be being beneficial for everyone. This is due to the fact that taxable yields end up being higher as compared to muni yields in order to compensate investors for the taxes.

Treasury bonds

Backed fully by taxing authorities, treasury bonds are issued by the federal government in order to finance the budget deficits. Due to having Uncle Sam’s full and official approval, such bonds are regarded as credit-risk free. They do have a critical downside, however, which is the fact that their yields tend to be the second lowest – just above tax-free munis.

However, they tend to outperform higher-yielding bonds during economic downturns, not to mention the fact that the interest on them is exempt from certain state income taxes.

Other U.S. government bonds

Alternatively known as agency bonds, these are normally supplied by federal agencies such as mainly Ginnie Mae (the Government National Mortgage Association) and Fannie Mae (FNM) (the Federal National Mortgage Association). Differing significantly from the mortgage-backed securities that are issued by the same agencies, as well as by Freddie Mac (FRE) (the Federal Home Loan Mortgage Corp.), the yield coming from such bonds are significantly higher than their Treasury counterparts. While they don’t have the full approval of the U.S. government at large, the credit risk for these bonds is considered minimal-to-none. Interest on such bonds is taxable at state as well as federal levels.

Generally speaking, bonds which don’t require too much investment (such as municipal bonds) are ideal for investors. That said, every investor and their portfolio have different kinds and combination of requirements. As an investor, you must consider all the advantages and disadvantages of municipal bonds in order to judge their appropriateness for your portfolio.

The following are the key advantages of municipal bonds:

Interest gained from Municipal bonds is mostly exempt from federal, state and even local income taxes:

Generally, an investor’s marginal tax bracket is the instrumental factor in deciding whether or not to invest in municipal bonds.

As an investor, it is always a good practice to first compare the yield of a muni bond with any comparable taxable bond’s after-tax yield. In order to do so, you must calculate the taxable equivalent yield of the muni bond. And in the event that the municipal bond you plan to invest in is not issued in the state of your residence, you should make the requisite calculation by equaling the taxable equivalent yield with the tax-exempt interest rate divided by one minus the marginal tax bracket. For example, if you are planning to invest in a municipal bond that has a yield of 4.5%, and your tax bracket is 25%, the taxable equivalent yield will end up being 6.0% (obtained by dividing 4.5% with 1 and then subtracting 25% from the same).

Municipal Bonds are available in a variety of choices:

Given that there are over 1.5 million outstanding issues of municipal bonds, one can easily determine the fact that bonds with all sorts of characteristics and combinations are available for investors to choose from.

Municipal bonds have high credit ratings in general:

While there are very few cases of municipal bonds defaulting, it is not entirely unheard of. As an investor, therefore, you must take the time to carefully review the credit quality before you go ahead and invest. In such situations, sticking with investment grade ratings is a good idea, since it indicates that the issuer is financially stable and therefore is unlikely to default.

As is the case with every type of bond, muni bonds too have some key disadvantages:

They cannot work with every portfolio-type:

Generally speaking, munis are not ideal for tax-advantaged plans such as 401(k) and individual retirement accounts (IRAs). This is due to the fact that municipal bond interest is exempt from federal income taxes, which means that you as an investor won’t gain anything by placing the bond in a tax-advantaged medium. On the contrary, the interest income, when withdrawn will be subjected to normal income taxes.

Municipal bonds can be redeemed even before they mature:

Having call provisions gives the issuer the power to redeem muni bonds before they mature. That said, the precise provisions vary from one type of muni bond to the other.

As an investor, you should review the provisions very thoroughly before you purchase a bond. Although doing so won’t allow you to stop an issuer if and/or when they make a call provision, it does allow you to purchase bonds with call provisions that are the best for you.

Usually, early redemptions occur when the market interest rates are lower than the interest rate of the bond. While you will the principal and maybe even a premium, the money will have to be reinvested later during a time when the interest rates are lower than what is paid on the original bonds.

Muni bonds remain subject to select taxes:

Although muni bonds are usually exempt from federal (and sometimes even state and local) income taxes, selling the bond prematurely can – and does often result in taxable gains. Furthermore, some bonds pay interest income that is subject to the alternative minimum tax (AMT).

Additionally, one should also consider local and State taxes in the event that the muni bond has not been issued in the state of your residence.

Are you one of the many people who are still holding on to their old Savings Notes (Freedom Shares), H or HH bonds, or E bonds? Maybe now is the time when you can actually do something with those. After all, those bonds no longer earn interest and perhaps are (or are on their way to) causing you tax problems. In fact, you’d be surprised to know that the United States Treasury Dept. says that there are current outstanding U.S. savings bonds that don’t earn interest are collectively worth over $12 billion!

Which brings us to the most important question – how can one know if their bonds belong to this category – and if it does, then what can be done about it?

The best way to find out is to check your old bonds. Originally known as E Bonds, these were issued by the federal government began since the mid-1930s. Issued in a variety of denominations, they were mostly bought by citizens at a 75 percent of face value discount. In simpler terms, an individual paid $75 to buy a $100 bond.

The federal government ceased issuance of E Bonds from June 1980 and replaced them with EE bonds. These bonds calculate the earned interest a bit differently from E bonds, with investors buying then at half of their face value and receiving interest from them bonds once they redeem the bonds.

The bonds keep earning interest till their ‘original maturity’ (i.e. the point when the original price paid for a particular bond and the accumulated interest equal the bond’s face value. Interest payments, however, can – and are extended automatically beyond that point (generally for a ten-year-period), till the time the bond reaches its ultimate maturity, after which it is unable to earn any interest.

This is often where things get difficult. Since actual final maturity dates often vary from bond-to-bond, so it can be confusing. Take as an example, the E bonds which were issued from May 1941. Originally matured as of November 1965, these bonds had 40 years till they reached final maturity. Today, almost all of them are no longer earning interest. Contrastingly, E bonds which were issued from December 1965 and reached original maturity by June 1980, have just 30 years till they reach final maturity. As of today, all E bonds that were issued until April 1975 no longer earn interest. As for EE Bonds – they too reach final maturity in 30 years from their original maturity. Given that none of them are older than July 1980, it is only a matter of a couple of years before they cease earning interest.

Savings Notes, also known as Freedom Shares, were all issued between May 1967 and October 1970, when the Vietnam War was at its height. Much like their Like E/EE counterparts, they were sold at a discount and the interest was deferred until redemption. They too had 30 years to reach final maturity do not earn interest any more.

H and HH bonds, however, are a bit different from the aforementioned. Bought by investors at face value, these bonds pay out interest semiannually and in cash. H Bonds were first issued by the government from June 1952 through January 1957. These reached final maturity in 29 years and 8 months. H bonds issued from January 1957 till the introduction of HH bonds in January reach final maturity in 30 years. As of today, H bonds issued till April 1975 no longer earn interest. That said, HH bonds, which were stopped by the government since August 2004, reach final maturity in just 20 years. Additionally, all HH bonds which are more than 20 years old must be cashed in order to retrieve the face value i.e. the original investment.

TAX IMPLICATIONS ON VARIOUS BONDS:

While there are no state and local taxes levied on savings bonds, one does have to pay federal taxes at the rate of ordinary income taxes.

H or HH bondholders, on the other hand, have to pay taxes on the interest that they receive annually; buyers need not pay when they redeem the last payment (which is actually a return of the principal amount).

With E and EE bonds and Savings Notes, however, bondholders will have to pay taxes on the accumulated interest either when they redeem them, or when the bonds reach final maturity (and have not been redeemed). Said interest income is taxable for the year of final maturity or redemption – whichever is applicable.

In case the bondholder ends up missing this particular time period, and have only recently realized that the E Bonds that they have at home matured years back, they will need to file an amended tax return and might also be subject paying interest and a late penalty. It is always advisable for people in this situation to speak to their financial or tax advisor first.

Any bond investor must have any and all of their investments well-suited to the objectives of the investment, degree of risk tolerance, as well as other personal circumstances. By referring to the following guide and keeping all factors in check, investors can determine the role their bonds have in their portfolio:

#1: Overall objectives of investment

Investors who value growth and have little to no concern for income are looking for better appreciation of capital. Bonds which fulfill such criteria won’t have a major role in their portfolios.

Total return investors, on the other hand need both capital appreciation and income generation in well-balanced proportions. Bonds, therefore, will have a more important place in their portfolios.

Income investors, who prioritize dividend or interest income over capital appreciation, will have bonds playing a very important role in their portfolios.

#2: Time Frame of Investment

The time period in which an investor needs the principal should be instrumental in the process of selecting bonds. Usually the yield increases with the lengthening of the maturity date. In fact, it is this reason why investors tend to purchase bonds that have long maturity dates – so that they can get higher yields.

The investor, however, must be very careful when using that strategy. In the event that they do purchase a long-term bond – and thereafter sell it before it matures, the market value of the bond can get severely affected by changes in interest rate. While it is impossible to control changes interest rate changes, it is certainly possible for investors to curb the effects of said changes by choosing bonds whose maturity dates lie closest to when the principal is required.

#3: Risk tolerance

Usually, the risk is greater when the return on the bond is high. This is exactly the reason why U.S. Treasury securities (considered to be some of the most stable and risk-proof bonds) carry lower rates of interest than their corporate or municipal counterparts. Before purchasing a bond, investors must be absolutely sure to have completely understood all risks involved.

#4: Desire to minimize income taxes

While income generated from U.S. Treasury securities is exempt from local and state income taxes, it is still subject to federal income taxes. Income generated from municipal bonds is totally exempt from federal income taxes and exempt from state and local income taxes – if the investor is a resident of the issuing state. Income from corporate bonds, however, is subject to both state and federal income taxes.

Investors who invest in bigger bonds generally tend to find ways to have their interest tax-exempted. Investors should, however, know that income tax exemption is exclusively applicable to interest income; any capital gained by selling a bond will still be subjected to income taxes.

#5: Personal Factors

The following personal variables should be taken into consideration when purchasing a bond. Any investor must make sure that the bond they are investing in fulfills these basic criteria by adeqautely answering the following questions:

What is the price of the bond?

Is the bond insured?

What is the credit rating of the bond?

What is the yield-to-maturity?

What is the maturity of the bond?

Does the bond have call provisions?

What is the coupon rate?

How is the bond’s interest income taxed?

The role that the bond will play in an investor’s portfolio will be totally dependent on the answers to the above questions.

So, you’ve been working hard and saving well for all of your professional life and are now on the threshold of retirement. Needless to say, the time for you now is to actually enjoy all that you’ve wanted to do so far.

Before you jump on the retirement bandwagon, however, you must ensure that your savings and post-retirement earnings are enough to last for the rest of your life – all while factoring the ups and downs of the market, unprecedented expenses, inflation, and of course, longevity.

However, it’s not as daunting as it may sound at the moment. By remembering the following key factors when making your post-retirement income strategy, you can make your life a smooth and easy one – with no worries of having to come out of retirement to earn. Ever.

#1: Longevity

Thanks to advancement in science and technology, the mortality rates have down a lot. This makes it quite likely for healthy 65-year-olds today to live until their 90s – or at least their 80s. And if one goes by currently available data, longevity expectations will only serve to increase in the coming future.

This implies that the possibility of people living for 30 years or more after retirement is pretty commonplace. And that needs an equal amount of income to boot. If you do not plan out your strategy thoughtfully, you may just end up outliving your savings and having to come out of retirement, or worse, living on Social Security as a source of income (Given that the average Social Security benefit is around $1,296 a month, one can say that it isn’t enough to cover all needs).

#2: Inflation

Just because the current rate of inflation is low, doesn’t mean that it won’t fluctuate. Even if it doesn’t, it will surely have a powerful impact over a long time – say, 20-30 years. This can – and does – have a profound effect on retirees, who unlike their younger, working counterparts do not have the option of relying on raises and incentives.

A lower rate of inflation too can have a profound impact on the purchasing power of a retiree. For instance, an inflation rate of 2% would turn what is $50,000 today into $30,477 25 years from now. Looking at this in another way, if you bought something by spending $50,000 today, you would have to shell out $82,030 to purchase the same thing 25 years from now. It is therefore important that you make your plans early and put into factor the effects of inflation in order to be able to maintain your current lifestyle.

#3: Market volatility

Ups and downs of the market can be extremely unsettling when a retiree who is banking upon living comfortably on a fixed amount for the rest of your life. No matter what the circumstances you will need stocks for growth potential, both when you’re saving for retirement and when you have actually retired. By default, the assets you have should be able to last you a minimum of 30 years.

#4: The Amount of Money Withdrawn

Now this one is a no-brainer – no matter how inflation- or market-proof your savings are, they won’t last long if you draw too much. On the other hand drawing too little (mostly out of fear of your savings diminishing) will have an adverse effect on your lifestyle and psychology.

A sound retirement income plan includes recommendations on the amount of money that you can safely withdraw from your savings and still have the confidence in the fact that you won’t run out of money. Believe it or not, planning in this area (or lack thereof) can have a dramatic effect on how long your assets will last.

Elements of a Sound Retirement Income Plan

Now that you know the factors you must consider when preparing a retirement income plan, you should know the various important elements that make a good one.

The following are the basics of a sound income plan for retirement:

#1: Guaranteed income that will take care of daily expenses

The first thing your plan should fully cover is your daily expenses. This covers all the non-negotiable requirements that you have as a human being housing, clothes, food, health care and utilities. Not only should this income be able to last for the rest of your lifetime (30 years or more), it should have sources of income that are stable and do not easily get swayed by external factors.

Generally, there are 3 main sources of guaranteed income:

– Social Security: For most, this acts as a base of income post-retirement. When and how you take money from here has a profound impact on your retirement. While it may be tempting to start taking the money the moment you are eligible (generally at 62 years of age), it can prove to be costly later. Starting at 62 instead of waiting till you reach full retirement age (FRA) will lead to reduced monthly benefits.

– Pensions: While pensions were very common in the past, that is no longer the case. In fact, the U.S. Department of Labor says that only 14% workers today have a proper pension plan to speak of. In the event that you fall among them, you must decide on how you would like to draw the money – as a monthly payment or as a lump sum. In case you are not among the 14%, you can follow certain paths that will allow you to make a pension-like stream of income.

– Annuities: Basically, an annuity is a contract made with an insurance company that pays you a set income in return for an up-front investment that you made. This payment can either be made over the rest of your life or over a set period of time, and is unaffected by market upheavals. Fixed income annuities are of several types, such as a deferred income annuity, immediate income annuity, and fixed deferred annuity with a guaranteed lifetime withdrawal benefit (GLWB).

#2: Growth potential that can fulfill long-term requirements

Aside from the daily, non-negotiable expenses, you will also have other expenses that will cater to your hobbies and dreams (for which you will have time) – such as pursuing a new hobby or going on a vacation or buying a boat. When you construct your income plan, you must make sure that it includes investments that have a potential to grow and try to keep up with the rates of inflation and meet these demands. A good practice in this regard is to use your investment portfolio and pay for these discretionary expenses. That way, you could easily cut back in case the market suffered a sudden downfall.

Having a mixed bag of cash, bonds and stocks, that work according to your frame of time, financial position, and market tolerance is a very good place to start. You must execute your strategy carefully though, because while a conservative strategy will lead you to miss out on the growth potential of stocks in the long-term, a plan that is too aggressive may lead to you taking far too many undue risks – which could prove very costly when the market becomes volatile.

#3: Flexibility that can help you refine your plan with the passage of time as much as possible

Quite obviously, the more flexible your plan is, the better it will perform. As a rule of thumb, your plan must be able to adapt to any curveballs it may get. Plenty of things in can happen after you retire – both good and bad – while you may get an inheritance, you may also experience a sudden medical emergency or have your parents move in. If and when such things happen, you must have a plan in place that can cushion you against the financial hardships that you will have to suffer otherwise.

One good practice that helps in this regard is to have income from different sources. Not only will this create a more diversified stream of income during retirement, it will also help you protect yourself against some very important risks like longevity, emergencies, inflation, and fluctuations.

Take for instance, a plan that includes a combination of taking withdrawals and income annuities. While the former is not guaranteed to stay for life, it does offer the chance to control how much money you can withdraw each month. The downside to this is that the money might just run out if you draw too much, live a long life or if the market hits a sudden low. Income annuities, on the other hands are not flexible and have very little potential to grow, but act as a guaranteed source income that will stay for life

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To Conclude…

It’s a given fact that everyone’s situation – both financial and social is unique, and there is no “one foolproof income strategy” that will suit the requirements of all investors. You must therefore, identify your own situation and requirements, determine the need of growth potential, and then plan a strategy that will best suit your life as a retiree.

To make things easier, you can try following these six easy steps to create a basic yet strong income plan that will serve you well once your retire – and will last as long as you live:

Step #1: Study your lifestyle and situation and make financial as well as personal goals

Step #2: Plan a basic retirement income strategy in order to determine how long your current savings will last, and how you can successfully extend this period while maintaining your lifestyle

Step #3: Determine the following factors

– When you should take the help of Social Security
– The portion of your investment portfolio that you want allocated to a contingency fund, protection, and growth potential
– How your investment portfolio will be managed and who will do the managing

Step #4: Execute your strategy with the right combination of savings and income-producing investments, which will serve to balance your investment priorities and financial requirements

Step #5: Review your savings and investments regularly with an investment professional and always make an effort to refine your portfolio so that to suit your personal and financial requirements.

In today’s day and age, there is no dearth of good retirement plans. That said, there are some caveats if you really want to benefit from them, the chief among them being the fact that there is no one way to achieve your goals and gain maximum profits.

According to Jennifer Landon, founder and president of Journey Financial Services, there is no such thing as a “silver bullet” when it comes to finding an ideal retirement plan. This is due to the basic reason that any retirement plan which qualifies as “good” is comprised of a combination of income sources that have specifically been structured for the set goals.

While there are more retirement plan options than one can count, here are five options that work best with almost all sorts of requirements:

PENSIONS

Quite unsurprisingly, pensions work as the best retirement plans on account of the fact that they ask very little from you. When it comes to pensions, the money is contributed by the employer and funds are managed professionally. All that is left for you to do, therefore, is to keep working till you qualify for it.

That said, it is not a suitable option for everyone. According to Marc Labadie, vice president of CR Myers & Associates of Southfield, Mich, pension plans today are very different than what they used to be. While they are standard for people working for the government and municipal corporations, they are getting decreasingly popular in the corporate sector. Even the pension plans that still stand have become less generous. In fact, many don’t even offer a cost-of-living adjustment, which means that the first payment and the payment of say, 30-35 years later (when you’ll be 90 or 95) will be the same.

Labadie further added that in order to live comfortably future retirees who do have pension plans should make it a point to save additional funds – or move down to a lesser lifestyle.

DEFINED CONTRIBUTION PLANS

Defined contribution plans like 401k or 403b allow you to give your future the kind of direction you desire by allowing you to choose your plan, change the options, make contributions, and over and above all – choose to participate (or not) in the first place. According to several financial, defined contribution plans serves as the best retirement plans – right next to pensions – since the employers who offer them usually match a specific portion of your contributions. Tim Swanson, executive vice president and U.S. head of Citizens Private Bank & Trust, says that in most cases, this turns out to be a dollar-for-dollar match, making an immediate 100% return on the employees’ money.

Needless to say, the biggest upside to such plans is having your contributions automatically deducted from the paycheck – thereby saving you the hassle of making an extra effort to save and/or invest. The downside, however, is that there is a limit to how much you can contribute. For instance, the limit for people under the age 50 (as of 2015) was $18,000, whereas the same limit was increased by $6,000 for people over 50 (and only in terms of catch-up contributions).

While some employers do offer a Roth 401k option, which tax the funds you contribute upfront, most 401ks are conventional and require you to pay taxes when you make withdrawals.

ROTH IRAs

Funded with taxed money, Roth IRA refers to an individual retirement account which will give you the opportunity to grow and make withdrawals – without paying taxes. According to Swanson, one of the best retirement plans (that he himself usually recommends) is to sign up for a 401k and then do a Roth IRA – in the event that they can afford it. Doing so will allow them to get a plan that is well-balanced and permits them to pre-tax contributions to the employer plan as well as after-tax contributions to the Roth plan – both at the same time.

Roth IRAs also come recommended for the younger savers, regardless of whether their plans are sponsored by their employer. Labadie says that it is very advantageous for the young saver (who literally is several decades away from retirement) to pay taxes today at a known rate today, see it grow tax-deferred, and finally pay out as tax-free – when the tax rate is unknown.

All said and done, Roth IRA too is not a viable option for all. Whether or not you’re eligible and how much you can contribute depends upon your modified adjusted gross income and tax filing status.

GUARANTEED INCOME ANNUITIES

Annuity refers to an insurance product which permits you to invest in the present day, and receive a guaranteed income stream in return from the time of your retirement. You get the option of receiving your payments per month, quarter, or year, or even as a lump sum.

Annuities are of several different kinds. There is the single-premium immediate annuity (SPIA), which allows you to invest and then trigger the income immediately (though it is currently not a popular option due to the low rates of interest). Also available is the deferred-income annuity (DIA) that has a cash-refund option. This is a much more popular option due to that fact that it allows you to control the time when you can trigger the income stream and gives you the options to not annuitize at all – if you don’t need and/or want it.

REAL ESTATE

If you’re close to retirement with no substantial savings in place, you should consider real estate as a viable retirement-planning option. According to Landon, while anyone can choose to opt for real estate as a retirement plan, it serves best for the 50-60 age bracket since they are the ones who need to prioritize their income-producing options.

Landon says that it is best to opt for the investment that will give them the most of their money. Real estate, for more reasons can one can – and does give this opportunity by creating a decent – yet constant income stream.

When it comes to making real estate your retirement plan, it is always recommended to purchase the property with a lump sum in order to avoid the complications and hassles of debt during retirement. You should also set apart some money for taxes and repairs.

The only downside of real estate is the fact that property management is an active process that requires constant working and involves ongoing and real risks. And that may turn out to be bothersome for some people. That said, once you weigh the pros and cons of real estate together you will realize that it might just prove to be a better option than most.

Putting a plan in place that can generate enough money to support you after retirement can be tricky at best. Not following the right plan…or rushing into something may just sound the death knell for all of your hard-earned savings.

Here are five great ways in which you can generate good income during your retirement. They’re no “get-rich-quick” schemes, and will need quite a bit of involvement; however, the rewards will be worth it in the end.

TOTAL RETURN PORTFOLIO

Constructing a portfolio of bond and stock index funds (or working with a financial advisor who does this work) is a fantastic way to create a stable source of income post-retirement. The portfolio, which is created to help you achieve a respectable long-term rate of return, allows you to additionally follow a specific set of withdrawal rate rules which will typically permit you to draw 4-7 percent a year. It will also allow you to increase your withdrawal in relation to inflation.

The logic that underlies “total return” is that you, the investor, are able to target a 10-20-year average annual return which exceeds – or at least equals your rate of withdrawal. While you may be targeting a long-term average, your returns can – and does deviate from said average every year. Therefore, in order to follow the investment approach successfully, you should maintain a diversified allocation that is independent of the yearly portfolio fluctuations.

This approach is best-suited to experienced investors, who are well-versed with the art and science of managing money and making timed, disciplined and logical decisions. It can also be taken by people who can – and are willing to invest by hiring an advisor who is experienced in using the approach.

RETIREMENT INCOME FUNDS

This is a special type of mutual fund, which automatically distributes your hard-earned money across a diverse portfolio of bonds and stocks by owning an assortment of other mutual funds. Specially constructed to provide a single package that can accomplish all needs and fulfill all objectives, these funds are managed with the sole aim of producing a stable monthly income, which is then distributed to you, the investor.

Funds vary in type on the basis of their objective – while some produce high monthly income use principal to fulfill their payout targets, others produce a low monthly income amount but have a more balanced approach as regards preserving principal.

The greatest advantage of a retirement income fund is for you to have the ability to control your principal amount and be able to access your money anytime you want. However, you must know that this comes with a catch – withdrawing amount from your principal will lead to a proportionate decrease in your future monthly income.

RENTAL REAL ESTATE

Quite unsurprisingly, rental property can – and does act as a stable source of income. Make no mistake, though – it is neither a get-rich-quick scheme nor a passive involvement where you can sit and earn while doing nothing. Owning and managing real estate is a proper business in itself, and will never generate proper income if it is not treated as such.

Rental real estate will include several different kinds of requirements – both intended and unintended – in terms of money, time and most importantly, involvement on your part. Therefore, you must factor-in any and all expenses and other things that may be required to maintain the rental property. You should also consider a definite time-frame for which you will own and maintain the property, and consider the vacancy rates (given that no property can remain occupied 100% of the time).

Unsure where to start? Try reading books on investing in real estate, talk to retirees who work as experienced investors, or join a club that specializes in real estate investing.

BONDS

Simply put, a bond is made when you loan your hard-earned money to a municipality, corporation or government. The bond, which is set to mature at a specific date, will earn the lender a specific amount of money (paid by the borrower) for a specific period of time until the bond matures, which is when the principal is returned to the lender. For many retirees, this interest income (called “yield”) which received from a bond (or a bond fund) can act as a stable source of income.

Bonds are of several types, each of which indicates the time-period before maturity and the level of financial strength of the bond’s issuer. Besides short-term, mid-term, and long-term bonds, there are floating rate bonds (which have adjustable interest rates), and high-yield bonds (which have low ratings but pay high coupon rates). Bonds are also available individually and in packages.

A bond’s principal value fluctuates with change in the rate of interest. For instance, a rising interest rate environment leads to decrease of existing bond values. While this principal fluctuation won’t matter if you plan on holding the bond to maturity, it will if you own a bond mutual fund and wish to sell it and use the funds for living expenses.

You should definitely buy bonds if you’re looking for small but stable income – and a guaranteed principal after a certain amount of time (i.e. once they mature). But if you’re trying to get high returns, or making gain on capital appreciation, you should consider other options.

Savings Notes/Freedom Shares were a kind of promotion which were issued between May 1967 and October 1970. Introduced by President Lyndon B. Johnson in February 21, 1967, SN/FS were offered to help serve the dual purpose of funding the rising costs of the Vietnam War (by increasing sales of U.S. Treasury) and helping citizens save their money and secure their future.

Issued on a discount of 81% of the face amount (for instance, a SN/FS with $100 face value was purchased for $81.00), Savings Notes/Freedom Shares were sold exclusively with Series E bonds and had an original maturity term of 4½ years. They were available in denominations from $25 all the way up to a $10,000 maximum size. These non-transferable, definitive security bonds reach their ultimate maturity after thirty years from the date issued.

Interest earned on savings note should be reported for Federal income tax purposes for the year in which the note gets redeemed, is disposed of, or reaches final maturity – whichever comes first. The note owner too can choose to report earned interest as it accrues annually; however, this decision must apply to all the accrual-type securities of the owner.

When the savings note is redeemed, interest on the same is paid as part of the current redemption value. Those savings notes which are unredeemed and/or un-matured accrue interest at the guaranteed minimum investment yield or a variable, market-based rate (like Series E and EE bonds) – whichever is higher. A savings note could be redeemable with a financial institution or The Federal Reserve Bank during any time.